I worked in Japan for more than 12 years in the eighties and nineties, in Osaka, Nagoya and Tokyo with the U. S. State Department, Citibank and Merrill Lynch. After many more years in China in banking (Deutsche Bank and Ping An Bank) and consulting, I am back in Tokyo conducting the business of Yangtze Century Ltd. (Hong Kong/Shanghai) and producing this blog. E-mail me at smharnerco@yahoo.com.

Best Hope For Abenomics: The China Market

The hoped-for “virtuous” reflationary cycle that is Abenomics’ crude Keynesianism puts higher incomes of households, in the form of wage increases paid by employers, on center stage.

Is this happening? The annual shunto industry-wide wage and bonus negotiations between companies and labor unions is in full swing and being closely watched. So far, most companies, especially in the crucial small- and medium-sized (SME) sector, are signaling that increases–especially base wages–will be modest.

Luckily for Abe, and possibly critical for the success of Abenomics, there is one place where wages and household are increasing strongly. It is China.

The biggest economic news in China now is how hard is has become for factories along China’s coast to find workers and how they are offering substantial wage rises to attract people.

I am in Shanghai this week. Wages in Shanghai have been rising too for all categories of workers. CPI inflation has settled down to around 3%. Wage increases will outpace this by a wide margin.

And two other factors are boosting household purchasing power. One is rise in the individual income tax exemption. In Shanghai the exemption is now up to RMB 3500 a month, a level that covers many categories of workers.

A second factor is the rise in returns available on savings placed in safe investments. Thanks to People’s Bank of ChinaBank of China tightening, banks are offering to small savers “principal protected” money market type “wealth management” products yielding 4-5%. Fixed term roughly 30, 60, and 90 day placement products are yielding 6-7%.

In short, savers in China, unlike in Japan, are enjoying real, income and wealth enhancing returns on savings. This is a “wealth effect” that translates easily into higher household spending.

Overall GDP growth in China this year is likely to be in the 7-8% range. Household consumption growth usually outpaces overall GDP growth, and this year should be no exception. For many Japanese companies, capturing a part of this growth will is a critical need in 2014.

(Note to readers who fear a China economic implosion as the “shadow banking” sector suffers massive defaults and inability to refinance: Don’t believe it. It is not going to happen.)

Abenomics needs a boost. Today Abe’s Cabinet Office released data showing that in the final 2013 quarter Japan’s GDP grew only 0.3% or an annualized rate of only 1% on a real (inflation adjusted) basis. This was well below the previously forecast 0.7% quarterly, 2.7% annualized rate.

So far, for Japan’s consumers Abenomics has delivered mostly higher living costs. As the yen has weakened, cost for imported fuel and food have risen. On a nominal (inflation unadjusted) basis, fourth quarter 2013 GDP increased 0.4% or an annualized 1.6%.

Clearly, Japan has emerged from (never very serious) deflation. Given the massive monetary stimulus being delivered by the Bank of Japan, this emergence was never in doubt. The doubt has been about sustainable growth, both on the supply and demand sides.

The last quarter GDP evidenced stronger domestic household consumption, up 0.5%, and strong housing investment, up 4.2%. A question is how much of this spending and investment was “front loaded” in advance of 3 percentage point rise to 8% from April in the consumption tax.

Business fixed asset investment increased a healthy 1.3%. Public works investment (Abenomics’ ‘second arrow’) increased 2.3%, down from the previous quarter’s 7.2%.

The main drag on GDP was the external sector which saw a net real 0.5% decline as imports increased by 3.5% while exports grew by only 0.4%. Energy (fuel for thermal power stations, now that almost all nuclear plants remain shutdown) was the main import item.

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